Insolvency Estate explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Three decisions show the same principle applied to a bank\'s set-off, a lender\'s possession and a criminal court\'s custody order. Whatever the source of the competing right, what belongs to the corporate debtor comes into the insolvency estate.
Set-off is not available — Vijay Kumar V. Iyer v. Bharti Airtel Ltd.
The NCLAT ruled that set-off of mutual debts is not allowed during insolvency proceedings. The reasoning was expressed directly:
"Accounting Conventions cannot supersede any express provisions of the laid down provisions of the specific law on the subject. IBC provides the mechanism of Moratorium during the CIRP till the Resolution Plan is approved or Liquidation order is passed. Further IBC has a provision to override other laws... Hence, even if there are some such provisions in any other law, IBC will prevail over that. In the present case, despite the bank having contractual rights of set-off, it cannot adjust the amount of FDR in its claim amount of BG."
So a contractual right of set-off does not survive the moratorium, and neither does an accounting practice of presenting mutual balances net. The amount owed to the corporate debtor comes into the insolvency estate at its gross value, and the counterparty proves for what it is owed.
This is worth holding clearly, because the two halves of the Code do not answer the question the same way.
In a corporate insolvency, set-off during the CIRP is not allowed. In a bankruptcy of an individual, section 173 requires it — the trustee must take an account of mutual dealings before the commencement date and set one against the other, with only the balance provable.
The difference follows from what each process is for. A CIRP is trying to preserve a going concern whose receivables are the working capital of the business; a bankruptcy is settling accounts between a person and their creditors.
Possession must be handed over — Encore ARC v. Charu Sandeep Desai
The NCLAT held that a secured lender which has taken physical possession of mortgaged property prior to admission of insolvency proceedings must hand over custody of the same to the interim resolution professional.
The Tribunal noted that it was not the appellant's case that the title of the assets had already been transferred or that they had been sold in terms of section 13(4) of the SARFAESI Act, 2002. On that footing it held that section 18 of the Code prevails over section 13(4) of the SARFAESI Act.
The qualification is important. Possession is not ownership. A lender that has taken possession but not completed a sale still holds the corporate debtor's property, and section 18 requires the interim resolution professional to take control of it for the insolvency estate.
Even a criminal court's custody order yields — Welworth Software
The NCLT Bengaluru Bench ruled that cash seized by an investigating agency and released to an individual under an indemnity bond must be returned to the liquidator and become part of the liquidation estate under section 36.
The Tribunal stated that:
- the Code has overriding effect over interim custodial orders of criminal courts; and
- an indemnity bond does not grant proprietary rights to the holder.
The respondent was directed to deposit the funds with the liquidator and permitted to apply to the criminal court for discharge of the indemnity bond. The custody arrangement was preserved as an arrangement; what it could not do was convert custody into title.
The pattern
| Competing right | Outcome | Basis |
|---|---|---|
| Bank's contractual set-off | Cannot be exercised | Moratorium; the Code overrides other laws |
| Secured lender's physical possession pre-admission | Must hand over to the IRP | Section 18 prevails over section 13(4) SARFAESI |
| Individual's custody under an indemnity bond | Must deposit with the liquidator | Section 36; the Code overrides interim custodial orders |
In each case the party held something of the corporate debtor's under a right that was real but possessory or contractual rather than proprietary. The insolvency estate takes precedence over all three.
Practical points
- Identify every mutual balance early; expect to collect the gross receivable and receive a proof of debt in return.
- Where a lender is in possession under SARFAESI, ask whether title has passed — that is the dividing line.
- Trace assets held by third parties under bonds, undertakings or custodial orders; they are recoverable for the estate.
- Offer the holder the route the tribunal offered in Welworth — deposit first, apply to be discharged from the bond afterwards.
Common mistakes
- Allowing a bank to net an FDR against a bank guarantee claim.
- Treating a completed SARFAESI possession as putting the asset beyond section 18.
- Applying the section 173 set-off rule to a corporate insolvency.
- Accepting that a criminal court's custody order removes an asset from the estate.